UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For Quarterly Period Ended June 30, 2007
Commission File Number 1-7107

LOUISIANA-PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 104,462,582 shares of Common Stock, $1 par value, outstanding as of July 26, 2007.

Except as otherwise specified and unless the context otherwise requires, references to “LP”, the “Company”, “we”, “us”, and “our” refer to Louisiana-Pacific Corporation and its subsidiaries.

 ABOUT FORWARD-LOOKING STATEMENTS

Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their businesses and other matters as long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. This report contains, and other reports and documents filed by us with the Securities and Exchange Commission may contain, forward-looking statements.  These statements are or will be based upon the beliefs and assumptions of, and on information available to, our management.

The following statements are or may constitute forward-looking statements:  (1) statements preceded by, followed by or that include words like “may,” “will,” “could,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “potential,” “continue” or “future” or the negative or other variations thereof and (2) other statements regarding matters that are not historical facts, including without limitation, plans for product development, forecasts of future costs and expenditures, possible outcomes of legal proceedings, completion of anticipated asset sales and the adequacy of reserves for loss contingencies.

Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to the following:

·                  changes in general economic conditions;

·                  changes in the cost and availability of capital;

·                  changes in the level of home construction activity;

·                  changes in competitive conditions and prices for our products;

·                  changes in the relationship between supply of and demand for building products, including the effects of industry-wide increases in manufacturing capacity;

·                  changes in the relationship between supply of and demand for raw materials, including wood fiber and resins, used in manufacturing our products;

·                  changes in the cost of and availability of energy, primarily natural gas, electricity and diesel fuel;

·                  changes in other significant operating expenses;

·                  changes in exchange rates between the U.S. dollar and other currencies, particularly the Canadian dollar, EURO and the Chilean peso;

·                  changes in general and industry-specific environmental laws and regulations;

·                  changes in tax laws, and interpretations thereof;

·                  changes in circumstances giving rise to environmental liabilities or expenditures;

·                  the resolution of product-related litigation and other legal proceedings; and

·                  acts of God or public authorities, war, civil unrest, fire, floods, earthquakes and other matters beyond our control.

In addition to the foregoing and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in the reports and other documents filed by us with the Commission that warn of risks or uncertainties associated with future results, events or circumstances identify important factors that could cause actual results, events and circumstances to differ materially from those reflected in the forward-looking statements.

ABOUT THIRD PARTY INFORMATION

In this report, we rely on and refer to information regarding industry data obtained from market research, publicly available information, industry publications, U.S. government sources and other third parties. Although we believe the information is reliable, we cannot guarantee the accuracy or completeness of the information and have not independently verified it.

2

Item 1.    Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

		Quarter Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Net sales		$	461.2		$	636.6		$	855.8		$	1,292.2
Operating costs and expenses:
Cost of sales		437.6			491.3			829.3			956.6
Depreciation, amortization and cost of timber harvested		27.4			31.0			55.9			64.0
Selling and administrative		38.3			38.8			78.5			79.7
(Gain) loss on sale or impairment of long-lived assets		(0.3		)	0.1			5.2			—
Other operating credits and charges, net		(19.2		)	—			(19.2		)	0.1
Total operating costs and expenses		483.8			561.2			949.7			1,100.4
Income (loss) from operations		(22.6		)	75.4			(93.9		)	191.8
Non-operating income (expense):
Foreign currency exchange loss		(12.7		)	(10.6		)	(15.5		)	(8.5		)
Interest expense, net of capitalized interest		(9.7		)	(14.3		)	(20.0		)	(27.7		)
Investment income		23.4			24.3			43.8			47.3
Total non-operating income (expense)		1.0			(0.6		)	8.3			11.1
Income (loss) before taxes and equity in earnings of unconsolidated affiliates		(21.6		)	74.8			(85.6		)	202.9
Provision (benefit) for income taxes		(10.9		)	19.0			(42.2		)	63.3
Equity in loss (earnings) of unconsolidated affiliates		4.9			(0.3		)	8.2			(1.5		)
Income (loss) from continuing operations		(15.6		)	56.1			(51.6		)	141.1
Discontinued operations:
Loss from discontinued operations before income taxes		(12.6		)	(1.7		)	(14.8		)	(3.8		)
Income tax benefit		(4.9		)	(0.7		)	(5.8		)	(1.5		)
Loss from discontinued operations		(7.7		)	(1.0		)	(9.0		)	(2.3		)
Net income (loss)		$	(23.3	)	$	55.1		$	(60.6	)	$	138.8
Net income (loss) per share of common stock (basic):
Income (loss) from continuing operations		$	(0.15	)	$	0.53		$	(0.50	)	$	1.34
Loss from discontinued operations		(0.07		)	(0.01		)	(0.08		)	(0.03		)
Net income (loss) per share - basic		$	(0.22	)	$	0.52		$	(0.58	)	$	1.31
Net income (loss) per share of common stock (diluted):
Income (loss) from continuing operations		$	(0.15	)	$	0.53		$	(0.50	)	$	1.33
Loss from discontinued operations		(0.07		)	(0.01		)	(0.08		)	(0.02		)
Net income (loss) per share - diluted		$	(0.22	)	$	0.52		$	(0.58	)	$	1.31
Cash dividends per share		$	0.15		$	0.15		$	0.30		$	0.30
Average shares of stock outstanding - basic		104.2			105.3			104.1			105.6
Average shares of stock outstanding - diluted		104.2			105.8			104.1			106.2

 

The accompanying notes are an integral part of these unaudited financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)

		June 30, 2007			December 31, 2006
ASSETS
Cash and cash equivalents		$	255.7		$	265.7
Short-term investments		645.9			797.0
Receivables, net of allowance for doubtful accounts of $1.2 million at June 30, 2007 and $1.4 million at December 31, 2006		180.8			157.4
Inventories		232.3			221.6
Prepaid expenses and other current assets		10.1			9.3
Deferred income taxes		8.8			28.5
Current portion of notes receivable from asset sales		37.1			—
Current assets of discontinued operations		18.5			24.5
Total current assets		1,389.2			1,504.0
Timber and timberlands		92.8			98.7
Property, plant and equipment		2,093.2			1,986.1
Accumulated depreciation		(1,167.0		)	(1,135.7		)
Net property, plant and equipment		926.2			850.4
Goodwill		273.5			273.5
Notes receivable from asset sales		295.9			333.0
Long-term investments		66.4			40.4
Restricted cash		62.6			51.8
Investments in and advances to affiliates		209.8			212.9
Other assets		31.9			27.1
Long-term assets of discontinued operations		33.9			44.6
Total assets		$	3,382.2		$	3,436.4
LIABILITIES AND EQUITY
Current portion of long-term debt		$	0.2		$	0.4
Current portion of limited recourse notes payable		36.5			—
Short-term notes payable		32.6			3.0
Accounts payable and accrued liabilities		229.8			237.9
Current portion of deferred tax liabilities		14.6			14.6
Current portion of contingency reserves		9.0			9.0
Total current liabilities		322.7			264.9
Long-term debt, excluding current portion:
Limited recourse notes payable		290.3			326.8
Other long-term debt		340.3			317.8
Total long-term debt, excluding current portion		630.6			644.6
Contingency reserves, excluding current portion		20.1			25.6
Other long-term liabilities		83.9			70.0
Deferred income taxes		341.9			363.9
Commitments and contingencies
Stockholders’ equity:
Common stock		116.9			116.9
Additional paid-in capital		435.9			435.8
Retained earnings		1,780.3			1,870.2
Treasury stock		(278.7		)	(284.0		)
Accumulated comprehensive loss		(71.4		)	(71.5		)
Total stockholders’ equity		1,983.0			2,067.4
Total liabilities and equity		$	3,382.2		$	3,436.4

 

The accompanying notes are an integral part of these unaudited financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)

		Six Months Ended June 30,
		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(60.6	)	$	138.8
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and cost of timber harvested		57.7			66.9
(Earnings) losses of unconsolidated affiliates		8.1			(1.5		)
(Gain) loss on sale or impairment of long-lived assets		14.2			(0.4		)
Stock based compensation expense related to stock plans		3.3			3.2
Excess tax benefits from stock based compensation		—			(3.3		)
Exchange loss on remeasurement		19.1			15.8
Cash settlement of contingencies		(6.9		)	(7.7		)
Pension (payments) expense, net		(2.1		)	(2.2		)
Other adjustments		(6.0		)	2.6
(Increase) decrease in receivables		(20.2		)	20.5
Increase in inventories		(0.7		)	(16.6		)
Increase in prepaid expenses		(1.9		)	(2.0		)
Decrease in accounts payable and accrued liabilities		(14.4		)	(10.0		)
Increase (decrease) in deferred income taxes		0.5			(48.0		)
Net cash provided by (used in) operating activities		(9.9		)	156.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant, and equipment additions		(132.3		)	(64.7		)
Proceeds from asset sales		2.0			1.5
Investments in and advances to joint ventures		(4.9		)	(8.8		)
Receipt of proceeds from notes receivable		—			70.8
Cash paid for purchase of investments		(1,538.1		)	(3,602.3		)
Proceeds from sales of investments		1,669.4			3,439.3
(Increase) decrease in restricted cash under letter of credit requirements		(10.8		)	16.0
Net cash used in investing activities		(14.7		)	(148.2		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt		13.0			—
Repayment of debt		(0.2		)	(189.1		)
Net borrowings under revolving credit agreements		29.6			—
Sale of common stock under equity plans		2.7			5.5
Purchase of treasury stock		—			(22.3		)
Payment of cash dividends		(31.4		)	(31.8		)
Excess tax benefits from stock-based compensation		—			3.3
Net cash provided by (used in) financing activities		13.7			(234.4		)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		0.9			(5.0		)
Net decrease in cash and cash equivalents		(10.0		)	(231.5		)
Cash and cash equivalents at beginning of period		265.7			607.6
Cash and cash equivalents at end of period		$	255.7		$	376.1

 

The accompanying notes are an integral part of these unaudited financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)

		Common Stock					Treasury Stock					Additional Paid-in			Retained			Accumulated Comprehensive			Total Stockholders’
		Shares		Amount			Shares		Amount			Capital			Earnings			Loss			Equity
Balance, December 31, 2006		116.9		$	116.9		12.7		$	(284.0	)	$	435.8		$	1,870.2		$	(71.5	)	$	2,067.4
Cumulative effect of adoption of accounting principle on prior years (see Notes 1 and 6)		—		—			—		—			—			2.1			—			2.1
Balance, December 31, 2006 (as adjusted)		116.9		116.9			12.7		(284.0		)	435.8			1,872.3			(71.5		)	2,069.5
Net income (loss)		—		—			—		—			—			(60.6		)	—			(60.6		)
Issuance of shares for employee stock plans and other purposes and other transactions		—		—			(0.2	)	5.3			(2.5		)	—			—			2.8
Amortization of restricted stock and other grants		—		—			—		—			2.6			—			—			2.6
Cash dividends		—		—			—		—			—			(31.4		)	—			(31.4		)
Other comprehensive income		—		—			—		—			—						0.1			0.1
Balance, June 30, 2007		116.9		$	116.9		12.5		$	(278.7	)	$	435.9		$	1,780.3		$	(71.4	)	$	1,983.0

 

The accompanying notes are an integral part of these unaudited financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LOUISIANA-PACIFIC CORPORATION AND SUBSIDIARIES
(AMOUNTS IN MILLIONS) (UNAUDITED)

		Quarter Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Net income (loss)		$	(23.3	)	$	55.1		$	(60.6	)	$	138.8
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		(1.6		)	(3.8		)	(2.0		)	(7.0		)
Unrealized gain (loss) on derivative instruments		—			0.2			(0.1		)	0.5
Unrealized gain (loss) on marketable securities		—			(0.2		)	—			(0.2		)
Defined benefit pension plans:
Amortization of prior service cost		0.2			—			0.4			—
Amortization of net loss		0.9			—			1.8			—
Other comprehensive income (loss), net of tax		(0.5		)	(3.8		)	0.1			(6.7		)
Comprehensive income (loss), net of tax		$	(23.8	)	$	51.3		$	(60.5	)	$	132.1

 

The accompanying notes are an integral part of these unaudited financial statements.

7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS FOR PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position, results of operations and cash flows of LP and its subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in LP’s Annual Report on Form 10-K for the year ended December 31, 2006.

Adoption of New Accounting Standards

LP adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. See Note 6 below for additional information, including the effects of adoption on LP’s Condensed Consolidated Balance Sheets and Consolidated Statement of Stockholders’ Equity.

LP adopted FASB Staff Position AUG AIR-1, “Accounting for Planned Major Maintenance Activities” (FSP AUG AIR-1) on January 1, 2007.  FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim reporting periods.  Permitted methods include direct expensing, built-in overhaul and deferral. LP will follow the deferral method in future periods. As a result of this adoption, LP recorded an increase to the beginning balance of retained earnings of $5.2 million or $3.3 million after tax. The impact of the adoption of this standard was immaterial to prior years.

Reclassifications

LP has announced its intent to divest its decking operations. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” LP is required to account for the businesses anticipated to be sold within one year as discontinued operations. Accordingly, commencing with the quarter ended June 30, 2007, LP is classifying its decking operations as discontinued operations and has reclassified all periods presented in the same manner.

NOTE 2 – STOCK-BASED COMPENSATION

For the quarters ended June 30, 2007 and 2006, the total compensation expense related to LP’s stock-based compensation plans was $1.8 million. For the six month periods ended June 30, 2007 and 2006, the total compensation expense related to all of LP’s stock-based compensation plans was $3.3 million and $3.3 million. At June 30, 2007, 5,334,163 shares were available under the current stock award plans for stock-based awards. For the six month period ended June 30, 2007, the fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: a risk free interest rate of 4.82%; an expected volatility factor for the market price of the Company’s common stock of 29.7% (based upon historical volatility over the expected life); a dividend yield of 2.6%; and an expected life of 4 years (based upon historical experience). For the six month period ended June 30, 2006, the fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: a risk free interest rate of 4.5%; an expected volatility factor for the market price of the Company’s common stock of 45.2% (based upon historical volatility over the expected life); a dividend yield of 1.9%; and an expected life of 4 years (based upon historical experience). The weighted-average fair value of each option or stock settled stock appreciation right (SSARs) granted during the six month period ended June 30, 2007 and June 30, 2006 was $5.54 and $10.26.

8

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NOTE 3 – EARNINGS PER SHARE

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock options, SSARs, restricted stock units and restricted common stock.

Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings per Share,” requires that employee equity share options, non-vested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

Dollar and share amounts in millions, except per		Quarter Ended June 30,						Six Months Ended June 30,
share amounts		2007			2006			2007			2006
Numerator:
Income attributed to common shares:
Income (loss) from continuing operations		$	(15.6	)	$	56.1		$	(51.6	)	$	141.1
Loss from discontinued operations		(7.7		)	(1.0		)	(9.0		)	(2.3		)
Net income (loss)		$	(23.3	)	$	55.1		$	(60.6	)	$	138.8
Denominator:
Basic - weighted average common shares outstanding		104.2			105.3			104.1			105.6
Dilutive effect of stock plans		—			0.5			—			0.6
Diluted shares outstanding		104.2			105.8			104.1			106.2
Basic earnings per share:
Income (loss) from continuing operations		$	(0.15	)	$	0.53		$	(0.50	)	$	1.34
Loss from discontinued operations		(0.07		)	(0.01		)	(0.08		)	(0.03		)
Net income (loss) per share		$	(0.22	)	$	0.52		$	(0.58	)	$	1.31
Diluted earnings per share:
Income (loss) from continuing operations		$	(0.15	)	$	0.53		$	(0.50	)	$	1.33
Loss from discontinued operations		(0.07		)	(0.01		)	(0.08		)	(0.02		)
Net income (loss) per share		$	(0.22	)	$	0.52		$	(0.58	)	$	1.31

 

Stock options and SSARs to purchase approximately 3.2 million shares for the quarter ended June 30, 2007 and the six month period ended June 30, 2007 were not included in the computation of diluted earnings (loss) per share due to LP’s net loss position in continuing operations.  Stock options and SSARS to purchase approximately 0.9 million shares at June 30, 2006 were considered anti-dilutive for purposes of LP’s earnings per share calculation due to the exercise price being greater than the average fair market price.

NOTE 4 – INVENTORIES

Inventories are valued at the lower of cost or market. Inventory cost includes materials, labor and operating overhead. The LIFO (last-in, first-out) method is used for certain log inventories with remaining inventories valued at FIFO (first-in, first-out) or average cost. The major types of inventories are as follows (work in process is not material):

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Dollar amounts in millions		June 30, 2007			December 31, 2006
Logs		$	35.5		$	54.9
Other raw materials		31.7			28.9
Finished products		160.7			133.6
Supplies		7.2			7.0
LIFO reserve		(2.8		)	(2.8		)
Total		$	232.3		$	221.6
Inventory included in current assets of discontinued operations
Logs		$	—		$	—
Other raw materials		2.4			4.3
Finished products		15.8			19.7
Supplies		0.3			0.5
Total		$	18.5		$	24.5

 

NOTE 5 – BUSINESSES HELD FOR SALE AND DIVESTITURES

At June 30, 2007 and 2006 and for the first six months of 2007 and 2006, LP’s discontinued operations included its decking operations and residual charges from previously discontinued operations.

Sales and losses for these businesses are as follows:

		Quarter Ended June 30,						Six Months Ended June 30,
Dollar amounts in millions		2007			2006			2007			2006
Sales		$	11.7		$	16.5		$	23.2		$	38.5
Loss from discontinued operations, net of tax		$	(7.7	)	$	(1.0	)	$	(9.0	)	$	(2.3	)

 

In the second quarter of 2007, LP recorded a loss of $9.5 million associated with impairment charges on assets held for sale to reduce the carrying value of these assets to their estimated sales price, which approximates the estimated fair market value of such assets, net of related selling expenses.

The assets of the discontinued operations included in the accompanying condensed consolidated balance sheets as of June 30, 2007 and December 31, 2006 are as follows:

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Dollar amounts in millions		June 30, 2007			December 31, 2006
Inventories		$	18.5		$	24.5
Property, plant and equipment		53.4			59.4
Accumulated depreciation		(19.5		)	(18.1		)
Net, property, plant and equipment		33.9			41.3
Other long-term assets		—			3.3
Total long-term assets of discontinued operations		33.9			44.6
Total assets of discontinued operations		$	52.4		$	69.1

 

NOTE 6 – INCOME TAXES

Accounting standards require that income tax expense be determined by applying the estimated annual effective tax rate (based upon estimated annual amounts of taxable income and expense) by income component for the year to year-to-date income or loss at the end of each quarter, further adjusted by any changes in reserve requirements or the impact of statutory tax rate changes, if any.  Each quarter the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter. 

		Quarter Ended June 30,						Six Months Ended June 30,
		2007			2006			2007			2006
Continuing operations		$	(26.5	)	$	75.1		$	(93.8	)	$	204.4
Discontinued operations		(12.6		)	(1.7		)	(14.8		)	(3.8		)
		(39.1		)	73.4			(108.6		)	200.6
Total tax provision (benefit)		(15.8		)	18.3			(48.0		)	61.8
Net income (loss)		$	(23.3	)	$	55.1		$	(60.6	)	$	138.8

 

For the six months ended June 30, 2007, the primary differences between the U.S. statutory rate of 35% and the effective rate on continuing operations relates to the Company’s foreign debt structure, state income taxes and the favorable resolution of an outstanding state tax contingency. For the six months ended June 30, 2006, the primary differences between the U.S. statutory rate of 35% and the effective rate on continuing operations relates to the Company’s foreign debt structure, state income taxes, and a second quarter reduction in LP’s Canadian deferred tax liabilities due to an enacted decrease in the statutory income tax rate.

The components and associated estimated effective income tax rates applied to the six month periods ended June 30, 2007 and 2006 are as follows:

		Six Months Ended June 30,
		2007					2006
		Tax Benefit			Tax Rate		Tax Provision (Benefit)			Tax Rate
Continuing operations		$	(42.2	)	45	%	$	63.3		31	%
Discontinued operations		(5.8		)	39	%	(1.5		)	39	%
		$	(48.0	)	44	%	$	61.8		31	%

 

LP adopted FIN 48 on January 1, 2007. As a result of the implementation, LP recorded $12.9 million as a FIN 48 liability for unrecognized tax positions of which $0.3 million (net of federal benefit on state issues) would impact

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LP’s effective tax rate if recognized.  This FIN 48 liability is recorded in “Other long-term liabilities” in the Condensed Consolidated Balance Sheets as of June 30, 2007. The implementation also resulted in a $1.2 million decrease to LP’s January 1, 2007 balance of retained earnings. LP does not expect to recognize any decrease in unrecognized tax benefits in the ensuing twelve months.

LP and its domestic subsidiaries are subject to U.S. federal income tax as well as income taxes of multiple state jurisdictions.  Its foreign subsidiaries are subject to income tax in Canada and Chile. U.S. federal income tax examinations for the years through 2004 have been effectively settled. LP has been advised that a U.S. federal audit for 2005 and 2006 will begin in the fourth quarter of 2007. LP is subject to state and local income tax examinations for the tax years 2000 through 2006. Canadian returns have been audited through 1999 and Revenue Canada began an examination of the years 2002 through 2004 during the second quarter of 2007.

LP’s policy is to record interest paid or received with respect to income taxes as interest expense or interest income, respectively, in the Consolidated Statements of Income. Penalties related to unrecognized tax benefits or assessments are charged to income tax expense. Upon the adoption of FIN 48, LP recorded $0.9 million of interest expense (net of tax benefit) as a reduction to retained earnings and no penalties.  During the first six months of 2007, an additional $0.6 million was accrued as interest expense.

NOTE 7 – OTHER OPERATING CREDITS AND CHARGES, NET

The major components of “Other operating credits and charges, net” in the Consolidated Statements of Income for the quarter and six months periods ended June 30, 2007 and 2006 are reflected in the table below and are described in the paragraphs following the table:

		Quarter Ended June 30,						Six Months Ended June 30,
Dollar amounts in millions		2007			2006			2007			2006
Timber recovery		$	1.5		$	—		$	1.5		$	—
Insurance settlement		17.7			—			17.7			—
Other		—			—			—			(0.1		)
		$	19.2		$	—		$	19.2		$	(0.1	)

 

In the second quarter of 2007, LP recorded a gain of $17.7 million associated with a gain from a favorable verdict on a legal suit associated with our insurance on hardboard siding and a gain of $1.5 million associated with a settlement with the Canadian government on the reduction of certain of LP’s timber licenses in British Columbia.

NOTE 8 – GAIN (LOSS) ON SALE OR IMPAIRMENT OF LONG-LIVED ASSETS

The major components on “Gain (loss) on sale or impairment of long-lived assets” in the Consolidated Statements of Income for the quarter and six months period ended June 30, 2007 and 2006 are reflected in the following table:

		Quarter Ended June 30,						Six Months Ended June 30,
Dollar amounts in millions		2007			2006			2007			2006
Gain (loss) on sale of long-lived assets		$	0.3		$	(0.1	)	$	(0.2	)	$	—
Impairment charges on long-term assets		—			—			(5.0		)	—
		$	0.3		$	(0.1	)	$	(5.2	)	$	—

 

In the first quarter of 2007, LP recorded an impairment charge of $5.0 million on a sawmill located in Quebec that is held for sale to reduce the carrying value of this equipment to its estimated sales price, which approximates the estimated fair market value, net of related selling expenses.

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NOTE 9 – INVESTMENTS IN AND ADVANCES TO AFFILIATES

LP has investments in affiliates that are either accounted for under the equity method or the cost method based upon the specific terms of the agreement as well as advances to affiliates. The significant components of these investments and advances are as follows:

Dollar amounts in millions		June 30, 2007			December 31, 2006
Investments accounted for under the equity method		$	165.3		$	168.4
Investments accounted for under the cost method		44.5			44.5
Total		$	209.8		$	212.9

 

At June 30, 2007, LP’s significant equity method investees and its ownership interest and principal business activity in each investee, were as follows:

		Ownership %
U.S. GreenFiber		50%		Established to manufacture and sell cellulose insulation products
Abitibi – LP		50%		Established to construct and operate I-Joist facilities in Quebec, Canada
Canfor – LP		50%		Established to construct and operate an OSB facility in British Columbia, Canada

 

These investments do not meet the Regulation S-X significance test requiring the inclusion of the separate investee financial statements or summarized financial information.

LP sells products and raw materials to the Abitibi-LP entity and purchases products for resale from the Abitibi-LP and Canfor-LP entities. LP eliminates profits on these sales and purchases, to the extent the inventory has not been sold through to third parties, on the basis of its 50% interest.  For the quarters ended June 30, 2007 and 2006, LP sold $4.1 million and $8.7 million of products to Abitibi-LP and purchased $22.0 million and $30.1 million of I-joist from Abitibi-LP.  LP also purchased $19.0 million and $28.1 million of OSB from Canfor-LP during the quarters ended June 30, 2007 and 2006.   For the six months ended June 30, 2007 and 2006, LP sold $7.3 million and $17.6 million of products to Abitibi-LP and purchased $36.9 million and $53.7 million of I-joist from Abitibi-LP.  LP also purchased $36.8 million and $44.8 million of OSB from Canfor-LP during the six months ended June 30, 2007 and 2006.

NOTE 10 – SELECTED SEGMENT DATA

LP operates in three segments: Oriented Strand Board (OSB); Siding; and Engineered Wood Products (EWP). LP’s business units have been aggregated into these three segments based upon the similarity of economic characteristics, customers and distribution methods. LP’s results of operations are summarized below for each of these segments separately as well as for the “other” category which comprises other products that are not individually significant.  Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2006.

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		Quarter Ended June 30,								Six Months Ended June 30,
Dollar amounts in millions		2007			2006			% change		2007			2006			% change
Net sales:
OSB		$	223.3		$	354.6		(37	)	$	412.2		$	752.3		(45	)
Siding		131.0			148.6			(12	)	235.1			269.4			(13	)
Engineered Wood Products		85.7			110.0			(22	)	166.0			222.4			(25	)
Other		23.9			23.4			2		47.5			48.1			(1	)
Less: Intersegment sales		(2.7		)	—					(5.0		)	—
		$	461.2		$	636.6		(28	)	$	855.8		$	1,292.2		(34	)
Operating profit (loss):
OSB		$	(44.6	)	$	62.4		(171	)	$	(109.1	)	$	173.3		(163	)
Siding		17.2			22.9			(25	)	26.6			41.5			(36	)
Engineered Wood Products		3.9			9.1			(57	)	10.3			20.3			(49	)
Other		(2.7		)	4.5			(160	)	(0.6		)	9.8			(106	)
Other operating credits and charges, net		19.2			—					19.2			(0.1		)
Gain (loss) on sales of and impairment of long-lived assets		0.3			(0.1		)	(400	)	(5.2		)	—
General corporate and other expenses, net		(20.8		)	(23.1		)	10		(43.3		)	(51.5		)	16
Foreign currency losses		(12.7		)	(10.6		)	(20	)	(15.5		)	(8.5		)	(82	)
Investment income		23.4			24.3			(4	)	43.8			47.3			(7	)
Interest expense, net of capitalized interest		(9.7		)	(14.3		)	32		(20.0		)	(27.7		)	28
Income (loss) from operations before taxes		(26.5		)	75.1			(135	)	(93.8		)	204.4			(146	)
Provision (benefit) for income taxes		(10.9		)	19.0					(42.2		)	63.3
Income (loss) from continuing operations		$	(15.6	)	$	56.1		(128	)	$	(51.6	)	$	141.1		(137	)

 

NOTE 11 – POTENTIAL IMPAIRMENTS

LP continues to review certain operations and investments for potential impairments. LP’s management currently believes it has adequate support for the carrying value of each of these assets based upon the anticipated cash flows that result from estimates of future demand, pricing and production costs assuming certain levels of planned capital expenditures. However, should the markets for the relevant products continue to remain at levels significantly below cycle average pricing or should LP decide to invest capital in alternative projects, it is possible that impairment charges will be required.

LP also reviews from time to time possible dispositions of various assets in light of current and anticipated economic and industry conditions, its strategic plan and other relevant circumstances. Because a determination to dispose of particular assets can require management to make assumptions regarding the transaction structure of the disposition and to estimate the net sales proceeds, which may be less than previous estimates of undiscounted future net cash flows, LP may be required to record impairment charges in connection with decisions to dispose of assets.

NOTE 12 – CONTINGENCY RESERVES

LP is involved in various legal proceedings incidental to LP’s business and is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. LP maintains reserves for these various contingencies as follows:

Dollar amounts in millions		June 30, 2007			December 31, 2006
Environmental reserves		$	8.8		$	7.7
Hardboard siding reserves		18.9			25.3
Other reserves		1.4			1.6
Total contingency reserves		29.1			34.6
Current portion of contingency reserves		(9.0		)	(9.0		)
Long-term portion of contingency reserves		$	20.1		$	25.6

 

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Hardboard Siding Reserves

LP has established reserves relating to certain liabilities associated with products manufactured that were the subject of a nationwide class action lawsuit. This settlement agreement relates to a nationwide class action suit involving hardboard siding manufactured or sold by corporations acquired by LP in 1999 and installed prior to May 15, 2000 and was approved by the applicable courts in 2000. This settlement is discussed in greater detail in the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2006.

Additional Siding Matters

On October 15, 2002, a jury returned a verdict of $29.6 million against LP in a Minnesota State Court action entitled Lester Building Systems, a division of Butler Manufacturing Company, and Lester’s of Minnesota, Inc., v. Louisiana-Pacific Corporation and Canton Lumber Company. On December 13, 2002, the District of Oregon, which maintains jurisdiction over a previously settled nationwide class action suit involving OSB siding manufactured by us and installed prior to January 1, 1996, permanently enjoined the Minnesota state trial court from entering judgment against us with respect to $11.2 million of the verdict that related to siding that was subject to the nationwide OSB siding settlement.  LP satisfied this verdict, less the enjoined amount, during the second quarter of 2004. Lester’s appealed the District Court’s injunction to the Ninth Circuit Court of Appeals and, on October 24, 2005, the Court of Appeals decided in a 2 to 1 decision to vacate the District Court’s injunction.   As a result of this decision, the injunction was lifted and the state court judgment of $11.2 million was entered on December 22, 2006.  On January 19, 2007, LP filed its notice of appeal to the Minnesota State Court of Appeals. Based upon the information currently available, LP believes that any further liability related to this case is remote and, accordingly, have not recorded any accrual with respect to our potential exposure.

Lockhart Wood Treatment Facility

During the third quarter of 2004, LP received a pre-litigation settlement demand letter from a law firm purporting to represent more than 1,400 potential plaintiffs who allegedly experienced various personal injuries and property damages as a result of the alleged release of chemical substances from LP’s wood treatment facility in Lockhart, Alabama during the period from 1953 to 1998.  The letter was also addressed to Pactiv Corporation (“Pactiv”), from whom LP acquired the facility in 1983. LP, Pactiv, and the potential plaintiffs agreed to exchange information and enter into non-binding mediation, which failed in December 2005.  In the months following the failed mediation, plaintiffs’ attorneys filed 19 separate lawsuits purporting to represent a total of 1,429 plaintiffs. Each of these cases was filed in, or removed to, the Federal District Court of Alabama which court has designated a lead case under the caption Melanie Chambers v. Pactiv Corp et al, CV 2:06-CV-00083-LES-CSC.  Due to the numerous uncertainties associated with the matters alleged in the letter and subsequent lawsuits, including uncertainties regarding the existence, nature, magnitude and causation of the alleged wrongful death, injuries and property damage, responsibility therefore and defenses thereto, LP is not presently able to quantify LP’s financial exposure, if any, relating to such matters.  LP intends to defend these suits vigorously.

Antitrust Litigation

LP has been named as one of a number of defendants in multiple class action complaints filed on or after February 26, 2006 in the United States District Court for the Eastern District of Pennsylvania.  These complaints have been dismissed or consolidated into two complaints under one caption:  In Re OSB Anti-Trust Litigation, Master File No. 06-CV-00826 (PD). The first complaint is a consolidated amended class action complaint filed on March 31, 2006 in which plaintiffs seek to certify a class consisting of persons and entities who directly purchased OSB from the defendants from May 1, 2002 through the date the complaint was filed (the direct purchaser complaint).  The second complaint is a consolidated amended class action complaint, filed on June 15, 2006, in which the plaintiffs seek to certify a class consisting of persons and entities who indirectly purchased OSB from the defendants from May 1, 2002 through the date the complaint was filed (the indirect purchaser complaint).

The plaintiffs, in both amended and consolidated complaints described above, seek treble damages in unspecified amounts alleged to have resulted from a conspiracy among the defendants to fix, raise, maintain and stabilize the prices at which OSB is sold in the United States, in violation of Section 1 of the Sherman Act, 15 U.S.C. §1.  The plaintiffs in the indirect purchaser complaint also seek similar remedies under individual state anti-trust and competition laws as well as consumer protection laws.  LP believes that the claims asserted are without merit, and

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intends to defend this matter vigorously.  LP is unable to predict whether the court will declare these actions to be class actions, and likewise is unable to predict the potential financial impact of these actions.

Other Proceedings

LP and its subsidiaries are parties to other legal proceedings. Based on the information currently available, management believes that the resolution of such proceedings will not have a material adverse effect on the financial position, results of operations, cash flows or liquidity of LP.

NOTE 13 – DEFINED BENEFIT PENSION PLANS

The following table sets forth the net periodic pension cost for LP’s defined benefit pension plans during the quarters and six months periods ended June 30, 2007 and 2006. The net periodic pension cost included the following components:

		Quarter Ended June 30,						Six Months Ended June 30,
Dollar amounts in millions		2007			2006			2007			2006
Service cost		$	2.4		$	2.5		$	4.9		$	5.0
Interest cost		3.9			3.9			7.9			7.8
Expected return on plan assets		(4.8		)	(4.6		)	(9.5		)	(9.2		)
Amortization of prior service cost		0.3			0.3			0.6			0.6
Amortization of net loss		1.5			1.9			3.0			3.8
Net periodic pension cost		$	3.3		$	4.0		$	6.9		$	8.0

 

Through June 30, 2007, LP recognized $6.9 million of pension expense for all of LP’s defined benefit plans. LP presently anticipates recognizing, assuming no curtailment or settlement expenses are required, an additional $6.9 million of pension expense in the remainder of 2007 for a total of $13.8 million.

Through June 30, 2007, LP made $9 million of pension contributions for all of LP’s defined benefit plans. LP presently anticipates making up to $1 million of additional pension contributions for the plans during the remainder of 2007.

NOTE 14 – GUARANTEES AND INDEMNIFICATIONS

LP is a party to contracts in which LP agrees to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to liabilities arising out of the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct of the indemnified parties. LP cannot estimate the potential amount of future payments under these agreements until events arise that would trigger the liability. See Note 20 of the Notes to the financial statements included in LP’s Annual Report on Form 10-K for the year ended December 31, 2006 for further discussion of LP’s guarantees and indemnifications.

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Additionally, LP provides warranties on the sale of most of its products and records an accrual for estimated future claims.  Such accruals are based upon historical experience and management’s estimate of the level of future claims.  The activity in warranty reserves for the first six months of 2007 and 2006 are summarized in the following table: 

Dollar amounts in millions		June 30, 2007			June 30, 2006
Beginning balance, December 31,		$	28.8		$	32.3
Accrued to expense		1.8			2.8
Payments made		(1.8		)	(3.6		)
Total warranty reserves		28.8			31.5
Current portion of warranty reserves		(7.0		)	(7.0		)
Long-term portion of warranty reserves		$	21.8		$	24.5

 

The current portion of the warranty reserve is included in the caption “Accounts payable and accrued liabilities” and the long-term portion is included in the caption “Other long-term liabilities” on LP’s Condensed Consolidated Balance Sheets.

NOTE 15 – RECENT AND PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB finalized SFAS 157, “Fair Value Measurements” (SFAS 157) which will become effective in 2008. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS 157 will be applied prospectively to fair value measurements and disclosures beginning in the first quarter of 2008 and is not expected to have a material effect on LP’s Consolidated Financial Statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115,” (SFAS 159) which will become effective in 2008. SFAS 159 permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings.  LP will adopt this Statement in fiscal year 2008 and is currently evaluating if it will elect the fair value option for any of its eligible financial instruments and other items.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in Accumulated Comprehensive Loss, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, the measurement date (the date at which plan assets and the benefit obligation are measured) is required to be the Company’s fiscal year end. Presently, LP uses an October 31 measurement date for a majority of its pension and postretirement benefit plans. LP adopted the recognition and disclosure provisions of SFAS 158 effective December 31, 2006, except for the measurement date provisions, which are not required until fiscal years ending after December 15, 2008.

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